Understanding the Individual and Employer Penalties Under PPACA

May 8, 2013

At the core of the Patient Protection and Affordable Care Act (PPACA), is the requirement that everyone carry health insurance coverage. And, since our health care has traditionally been delivered through our employers, the law applies to both individuals and employers. So, there are separate rules and affordability standards that are involved and ultimately causing confusion lately among HR professionals and employers. And once employees begin learning about these rules later this year, they will likely be going to their employers with lots of questions. This article will help to make sense of the rules from both the employee and employer perspectives, as we understand them today and keeping in mind that additional guidance will likely continue to be issued.

So, how do we define “affordable coverage” under PPACA?

Affordable coverage is the maximum amount of an individual's income that can be spent towards purchasing health coverage through an employer or through a state or federal Health Care Marketplace (also known as an “exchange”) to determine exemption from or application of a penalty.

How it's Measured

There are two separate thresholds used to measure affordability. One applies to an employer and the amount the employer requires the employee to contribute to the employee only portion of health coverage, and one applies to an individual when purchasing coverage through an exchange. Add to these two thresholds the term “household income”, which some employers have been getting hung up on, and you've got enough material to cause confusion and a little bit of panic.

Let's look at the two scenarios separately:

For the large employer to avoid penalty, coverage must be “affordable” and must meet “minimum value” standards. Under a safe harbor through at least 2014, coverage is “affordable” if the cost of single coverage is less than 9.5 percent of the employee's W-2 income.

For an individual, he or she is not subject to the individual mandate penalty if the cost of coverage exceeds 8% of HOUSEHOLD income.

So for an employer, don't worry about “household” income, which obviously would be tough (or almost impossible) for employers to track and manage. You're good with looking at W2 income.

For individuals, there are also other exemptions. If you are covered by Medicare, Medicaid, the Children's Health Insurance Program (CHIP), Veteran's Administration and/or Tricare, Indian Health Services or a health-care sharing ministry, you are exempt from the mandate.

Example

Carrie's Carpet Cleaning is a large employer and offers coverage that meets the minimum value standards to all full-time employees and charges $200 per month for single coverage. Alison is the lowest-paid full-time employee and makes $30,000 a year. 9.5% of $30,000 is $2,850 per year or $237.50 per month. Alison's contribution is less than 9.5% of her W2 income of $30,000 so the employer will not be subject to penalty.

What if Alison has children? Remember, the employer only has to contribute to single coverage. The dependent portion does not require an employer contribution. So, if the dependent coverage cost $400, plus $200 for the employee single-only portion, the total cost to the employee would be $600 per month. This would still be considered affordable, because the cost of the single coverage to Alison is less than 9.5% of W2 income. If Alison went to an exchange, she could not get a subsidy because her employer is offering her affordable coverage, although it is hypothetically possible that she could get coverage cheaper through the exchange, even without a subsidy.

There are other options an individual would need to consider based on their circumstances. What if Alison has a spouse? The spouse would potentially be able to get subsidized coverage at the exchange because the employer doesn't have to offer spouse coverage. And, the children might be eligible for coverage under the Children's Health Insurance Program.

Ultimately, for an individual, if the cost of coverage is more than 8% of household income, he or she will not be subject to the individual mandate penalty (greater of $95 or 1% of income in 2014).

For an employer, just look at the gross W2 income and make sure your contribution strategy keeps the employee contribution under that 9.5% mark.